Bonus schemes: be careful about changing the rules

A recent Employment Appeal Tribunal case is a useful reminder that employers cannot always change the rules of a bonus scheme after a decision has been made.

In Chandrashekarappa v Wipro, an employee was told he could receive a discretionary "kitty bonus" of up to 1% of the revenue generated from new business, provided it was approved by the relevant sector lead. After the employee secured a major contract, the sector lead approved the full 1% bonus.

However, before the bonus was paid, the employer introduced new requirements. It added another level of approval and placed a cap on the amount that could be paid. As a result, the employee received much less than he had originally been told he would receive.

The Employment Appeal Tribunal found that this was an unlawful deduction from wages. Once the sector lead had approved the bonus under the rules that had been communicated to employees, the employee had become entitled to it. The employer could not later add new conditions or reduce the amount payable.

So, what does this mean for HR?

The main takeaway is that a bonus described as "discretionary" does not give an employer complete freedom. Once a manager has exercised their discretion and approved a payment, an employee may have a legal right to receive it.

HR teams should make sure that bonus schemes clearly set out all approval processes, limits and conditions from the start. If senior sign-off or payment caps are required, these should be included in the scheme before any decisions are made.

This case is a good reminder that employers should think carefully before changing the rules of an incentive scheme. Once an employee's entitlement has been established, it may be too late to do so.

If you have and questions about the points raised here, please get in touch and see how our employment team can help on 01635 896 336 or email employment@fentonelliott.co.uk

Disclaimer: This summary is for general awareness and insight, not legal or professional advice and readers should seek professional advice for their situation.